Thank you. This is Martha Jones Denning, principal, public sector accounting board at CPA Canada, and I'm Stephenie Fox, vice-president of standards at CPA Canada.
On behalf of the Chartered Professional Accountants of Canada, I want to thank you for the opportunity to appear before you today.
By way of background, I'm a Canadian chartered professional accountant and am the vice-president of standards at CPA Canada.
The chartered professional accountant designation is Canada's only business and accounting designation. It and CPA Canada were established through the unification of Canada's three legacy designations: chartered accountant, certified management accountant, and certified general accountant.
CPA Canada is now one of the largest national professional bodies worldwide with more than 200,000 Canadian CPAs working at home and abroad. One of CPA Canada's primary objectives is to serve the public interest. One of the ways that CPA Canada does this is by funding the independent standard-setting processes that are delivered through Canada's accounting and auditing standards boards.
One of these boards is the public sector accounting board, which we call PSAB. PSAB establishes standards and other guidance for financial reporting by all Canadian entities in the public sector. PSAB's mission is to contribute to supporting informed decision-making and accountability by maintaining a financial reporting framework that provides a basis for high-quality information reported by Canadian public sector entities.
This afternoon I am here to speak about the importance of consistency between the estimates and the public accounts and why this will serve the public interest, increase accountability to the public, and facilitate more informed resource allocation and other policy decisions in government.
As you know, the three main pillars of the financial cycle of the federal government are the budget, the main and supplementary estimates, and the public accounts. The financial cycle of government is an accountability cycle. It plays a major role in fulfilling a public sector entity's duty to be publicly accountable, as long as that information is understandable and prepared on a consistent basis.
The public and its elected representatives are the primary users of government budgets and financial statements, so it is crucial to be able to compare what was planned to what actually happened. They need the information to be clear and understandable. This is why the federal budget and financial statements are prepared on the same basis, which is an accrual basis of accounting.
Since 2003, federal budget and public accounts have been prepared on the same full accrual basis for the same reporting entity, and this means that it's easy to compare actual and budgeted performance. But the main and supplementary estimates remain on a cash basis, so comparing the estimates to the budget and public accounts is complicated. This does not help when we're trying to hold government to account.
Accountability is best achieved when those to whom an entity is accountable understand the financial information provided to them. If all three pillars of the financial cycle are on the same basis, comparing the actual results to those planned is easier to do and it's easier to understand. This is why moving the estimates to an accrual basis makes good sense. We applaud the government for addressing this issue and committing to better align the estimates and public accounts.
Let me elaborate a little. Currently, federal government managers are responsible for both cash and accrual based performance. As of April 1, 2001, all federal departments and agencies had successfully implemented new financial systems capable of handling accrual financial information for the preparation of summary financial statements. Accrual accounting information was also implemented to support cabinet-level decisions.
But the clear and understandable link to the estimates is still missing. This is problematic, because generally speaking, if it's not measured, it's not managed. When appropriations are on a cash basis, it is only that part of the balance sheet, the cash account, that is being managed.
Accrual accounting is about all parts of the balance sheet, not just cash, but all of the other assets and the liabilities, too. It's also about parts of the operating statement, including all revenues and expenditures. Accrual appropriations will deal with all parts of the balance sheet and the operating statement, including all assets, liabilities, revenues, and expenditures. This is better management and will allow better accountability.
When all three pillars of the financial cycle are on the same basis, the cycle moves from a process orientation to a performance orientation. If they can follow the links, then MPs can evaluate if the public resources they allocated to a particular activity have achieved the results they wanted. A change to accrual-based estimates is possible. Two major Canadian jurisdictions, British Columbia and Ontario, have already done it successfully.
Let me make it clear that moving to accrual-based estimates does not mean the government would no longer manage cash. It would continue to manage cash. Moving to accrual-based estimates also does not necessarily mean that Parliament would no longer approve capital spending every year. It probably still would, although separately, because capital expenditures are large amounts and they still deserve parliamentary scrutiny. What accrual-based estimates means is that appropriations would supply the funds needed to accomplish the accrual-based performance planned for the activities, programs, and entities of government.
Let me summarize. The benefits of moving to accrual-based estimates are as follows.
First, financial accountability will be improved because the three pillars of the government's financial cycle would speak the same language.
Second, we would have improved parliamentary scrutiny and financial oversight because the link between the appropriations, the budget, and the actual results can be made. Improved resource allocation would also result because there could be a connection made between resource allocation, actual financial results, and actual outcomes.
Last, we would have improved decision-making because complete and consistent information is available from all three pillars.
This is not to say there are not challenges. We recognize this, and we believe they should be outlined and they should be planned for. Challenges will include changing the processes, making sure that everyone understands them, from program managers to elected officials, and changing the culture in the federal public service.
For example, the existing approach is entrenched and familiar, so it will take time and effort to change. MPs are generally not accountants, so there would need to be an education process and the time to transition. If appropriations are on an accrual basis, there will be some items that won't seem to fit within the traditional idea of appropriation. For example, something we call depreciation is an accounting allocation, not a use of funds. Some people would question whether making an appropriation for depreciation makes sense. I would submit it does, but there would be some complexities that would need to be ironed out and planned for.
The issues can be overcome with time, effort, and education, and the fact that some major jurisdictions have achieved this demonstrates that there is value in the change. It all comes back to serving the public and being accountable to the public. That means ensuring the process for using and managing public money is transparent, understandable, and complete. It must ensure understandability, so there can be appropriate levels of parliamentary scrutiny and financial oversight.
Moving to accrual-based estimates makes good sense. For it to work, the public and its elected representatives need to see and understand how they would work and how they would improve accountability.
May I respectfully suggest to the standing committee, if it has not already done so, that you seek testimony from appropriate officials from the departments of finance of the governments of British Columbia and Ontario. These jurisdictions have already moved to accrual-based estimates. They fully understand the pros and cons of such a move because they have experienced it, and they have learned how to tell the public and their elected representatives what the changes mean.
With a four-year mandate ahead of this Parliament, now is the time to put in place long-term initiatives that will transform how government works, and how it shows it is accountable for using and managing the public resources entrusted to it.
Ensuring that the estimates are prepared on the same basis as the budget and public accounts simplifies and improves the accountability provided through the financial cycle of government.
Thank you. I'd be more than happy to address any questions or comments.
Let me try to make the analogy with cash. The importance of cash is understandable.
Cash is only one of the resources that government has. It's an important resource, but a government has many other resources. If you think about capital assets, buildings are an easy one, but military equipment that the Department of National Defence is responsible for would be another one. When you're managing only on cash, you're focused on the cash. When you're managing on an accrual basis, you're focused on all the resources that a government is responsible for. Once you start focusing on all those things, you manage differently.
I will use the pension liability example. In a way it's an easy example from the accounting perspective. I'll try not to get too technical, but there's a very big difference between looking at pensions—and governments obviously have large pension liabilities—and looking at pensions on a cash basis. On an annual basis, the government would pay a certain amount of funds to fund pension liabilities or the pensions of its employees, but on an accrual basis, it's the importance of looking long term, what that's really going to cost us down the road.
If you're only managing on a cash basis, you're managing for the next year. When you're looking longer term at the full liability, you're saying the commitment you made today to your employees has a cost beyond just today or just next year, that it has a cost down the road. Ultimately, it will flow through to future generations. There's almost a transfer of intergenerational equity. We've seen that if you're not looking at that or paying attention to that, you are less likely to manage that, and less likely to make decisions that look down the road and are longer term in nature.
Does that help?
No. In preparation for this, one of the things we looked at were some other Westminster-based democracies.
What we do at CPA Canada is set standards for the financial statements. We don't set standards for the budget or the estimates, but we do recognize accountability is improved if they're all on the same basis. When we looked at the other Westminster democracies, we wanted to see if they had moved to accrual-based appropriations. We looked at the U.K., New Zealand, and Australia, and the answer was, yes, they had.
When we looked at what they put behind it—and it took a long time; New Zealand has probably been doing it the longest—they require all of their departments and agencies to submit their plans on a full accrual basis: this is what we think we raised in revenues; this is what we'll spend; these are the programs that are behind those expenses; this is the outcomes we expect, and they give them authority to do that. How do they vote? I didn't have enough time to get into the detail of that.
As Stephenie and I were discussing—two Canadian examples, B.C. and Ontario, are good ones, and New Zealand is another good example to look at. They've been through the process. In terms of doing the research for appearing in front of you today, when we looked at those Westminster-based democracies, the New Zealand information was easy to understand and easy to follow.
Perhaps the researchers that work for you might be able to source some of that information for you, because I think it would add to your discussion.
It's always difficult in these situations to assess cost versus benefit, because typically, cost is very easy to quantify, and benefits are more qualitative, so they're often difficult to quantify. However, I believe that the benefits do outweigh them, and certainly, when we've looked at the practices in other jurisdictions, this is really a best practice.
I must say that we both worked in public sector accounting in Canada for quite a long time, and actually, Canada globally is a world leader. Certainly the federal government and the provinces are far ahead of many other countries in the world, and we are a world leader in terms of best practice. This is the last piece of that best practice that is just not there yet that would take it one notch up toward completing the cycle and completing the circle.
In terms of training and transition costs, there would certainly be costs. Any time there's a change, then those costs would have to be counted and they would have to be planned for. I would fully support the comment that there will be a transition period and that it may be quite lengthy to get all of those processes into place. We don't have the expertise here to know exactly what that would be.
We haven't done all of the research with all of the other governments, but I would submit that, when you see the number of other governments that are already doing this and have seen the benefits in terms of performance management and managing all of the other resources, they have seen the value of this. They haven't turned back, in other words. If you look at the research, it does support this, but it's always difficult to quantify benefits. It's always easier to set out the costs.
I am not sure I have the expertise to answer that question satisfactorily for you.
With the international ones we looked at, it was just one piece of a whole process that was outcome oriented. You establish what outcomes you want, and then you work back and decide what use of resources is needed to get to those outcomes.
I think that is one of the reasons previous witness testimony we have seen, before the 2012 report this committee did, indicated that it would take a long time to do because, as Stephenie said in her remarks, it is a whole culture change.
This government is partway there already. The budget is already on an accrual basis. The financial statements are on an accrual basis. They compare actuals to budget. They have a feel for that.
The last piece is what we have authorized you to do in Parliament, in terms of the use of cash, in this case. How do we link, “We have authorized you to use this amount of cash” to this outcome? As MPs, you don't have that information. Taxpayers can't evaluate and hold the government to account on that basis.
They have all done it in different ways, but they have tried to make it outcome oriented rather than just output oriented. It is a culture change, as well. As I said, though, this government is partway there with that. It is just that last link to the appropriations that is missing.
Mr. Chair, thank you for inviting us to take part in the committee's study of the estimates process.
With me today are Richard Domingue, principal responsible for audits of Finance Canada, and Karen Hogan, principal responsible for the audit of the government of Canada's financial statements.
I'd like to start by providing a brief overview of the mandate of the Office of the Auditor General. We conduct performance audits of federal departments and agencies and we conduct annual attest audits of the financial statements of the Government of Canada and of crown corporations. On a cyclical basis we also conduct special examinations of the systems and practices of crown corporations.
In our performance audits, we examine whether government programs are being managed with due regard for economy, efficiency, and environmental impact. We also look to see if there are means in place to measure the effectiveness of programs. Although we may comment on policy implementation, we do not comment on policy itself.
We report our performance audits to Parliament in the reports of the Auditor General of Canada and in the reports of the commissioner of the environment and sustainable development.
Mr. Chair, we are pleased to participate in the committee's study of the estimates process. We are aware that the President of the Treasury Board appeared before this committee and announced his intention to make some changes to the process.
The budget and the estimates process are the first steps in the government's financial reporting and accountability cycle that ends with the tabling of the public accounts of Canada.
We provide an audit opinion on the federal government's financial statements, which are included in the public accounts of Canada.
I would like to mention some issues related to the estimates process.
First, the main estimates do not include all of the expenses forecast in the budget. For example, the 2016 budget included expenses of $317 billion, while the main estimates totalled $250 billion. The main estimates do not include all of the expenses forecast in the budget because the main estimates are finalized before the budget. Planned expenses relating to new budgetary measures are included in supplementary estimates, which are tabled in Parliament after the start of the fiscal year.
Second, through some of our recent performance audits, we've identified that more information should be available to parliamentarians as part of the estimate process. For example, in 2012 we audited the management of interest-bearing debt and observed that the public debt charges associated with the unfunded pension liability of public sector pension plans needed to be better reported in the estimates. This has now been done.
Also, in 2015 we noted that tax-based expenditures are not subject to scrutiny through appropriation bills, and are therefore not reviewed by parliamentarians.
Finally, we recently reported on the $400-million venture capital action plan which was a non-budgetary transaction. This highlights the importance of all types of expenditures, budgetary and non-budgetary.
In the past, we have also commented on the fact that the estimates are prepared on a cash basis while the budget and the financial statements are prepared on an accrual basis. Under the accrual method, financial transactions and other economic events are recorded when they occur rather than only when the entity receives or pays cash.
Parliamentary committees play a crucial role in government accountability. To help members of Parliament, a number of years ago, we produced a reference guide called "Examining Public Spending", which we have provided to all parliamentarians after every general election as recommended by this committee in 2003. We provided an internet link to this guide to all members of Parliament in November of 2015. The guide includes a description of the supply process and suggests some questions that committee members may wish to ask when reviewing the estimates documents.
Mr. Chair, this concludes my opening statement. We'd be pleased to answer your questions.
I guess Treasury Board Secretariat would have to answer that, but I can give you some thoughts on it.
Fundamentally it needs to come down to parliamentarians understanding what they are voting on when they are voting on an accrual basis rather than a cash basis. I think it also comes down to the Treasury Board Secretariat and the government having appropriate ways to control what is being voted, when it's voted on an accrual basis.
For example, departments will get a capital budget. Capital expenditures do not affect the bottom line surplus or deficit. It's buying an asset. What affects the bottom line surplus or deficit is the amount of amortization that is recorded in a given year and how much a particular asset depreciates in that year. In the budget process, there would have to be both. There has to be approval to acquire the capital asset, so that's essentially a cash transaction. It's not exactly, but essentially it's an approval to acquire the asset, but also it's an estimate or an appropriation to approve the recording of the amortization. You wouldn't want a department to record less amortization, for whatever reason, and use the excess of that amortization appropriation to spend on something else.
I think there are some types of accrual expenditures, like amortization and some other types of expenditures, that would need to be protected so that departments couldn't spend it on something else. I think Treasury Board Secretariat is wrestling with those types of issues.
You can also run into issues with pension accounting where because of the way the expense is recorded in pensions, it's based on a lot of assumptions, a lot of assumptions about future events, and trying to establish what's the value of the pension benefits earned in that year. That may be different than the amount of cash that has to go into the pension plan in that year. On an accrual basis, the estimate may show one thing for pension expense, but the amount of cash that needs to be paid into the pension plan may be different. It may be higher than the pension expense, probably not right now, but in some cases that can happen, and I've seen that happen in my experience in New Brunswick.
There are some things like that which people need to be aware of in terms of the differences between accrual and cash accounting. In my opinion, doing the estimates on an accrual basis is preferable, but people need to understand what those differences are.